Summer 2007

CONTINGENT PAYMENT THE CONTINGENT PAYMENT BILL BILL PASSES By Richard Gary Thomas Thomas, Feldman & Wilshusen, LLP After many years of effort on the part Counsel, Richard Thomas. of subcontractors, suppliers and the staff Legislators who deserve special Now that the Contingent Payment of the Construction Association, thanks for their support of this legislation Bill passed, what does it mean? To an- SB 324, the Contingent Payment bill include the Sponsors, Senator Bob Deuell swer that question one must understand passed both the Senate and the House and and Rep. Warren Chisum; Senator Troy what the Bill is, and what it is not. will become effective on September 1, Fraser, the Chair of the Senate Business 2007. Senator Bob Deuell of Greenville and Commerce Committee who gave a sponsored the bill in the Senate and preferential setting; Rep. Burt Solomons Overview. First, the Bill is a compro- Representative Warren Chisum of Pampa who engineered the deletion of a bad mise between numerous construction as- sponsored the bill in the House. amendment; Rep. Gary Elkins, Rep. sociations and a few general contracting Getting an early start, SB 324 was Dwayne Bohac, and Rep. Armando companies. Before the Texas Construction the first bill heard in the Senate Business Martinez, who served as Floor Leaders Association was formed, the American and Commerce Committee this Session when the bill was considered on the and was the first bill passed by the House Floor; and the Chair of the House  This article is intended to be a broad general Committee. The Committee vote was Business and Industry Committee who explanation to construction industry personnel of unanimous in favor of the bill and the helped get the bill out of the Committee, the concepts in the contingent Payment Bill. No attempt has been made to discuss all aspects and bill was passed by the Senate on the first Rep. Helen Giddings. corresponding legal issues presented by the Bill. Local and Uncontested Calendar in mid- The staff and members of the Texas Due to its general nature, this article should not March. As is usual, Senate bills in the Building Branch of the Associated be used as legal advice or a legal opinion in spe- House are not generally considered on General Contractors also worked in cific situations. This discussion is too general to be applied in any specific situation. In that case, the House Floor until May as the House support of the passage of the bill. Their one should seek the advice of an attorney. gives preference to House bills. efforts were important in getting the bill continued on page 4 An unfriendly amendment was placed passed and are greatly appreciated. on the bill in the House Committee but The biggest thanks goes to the was withdrawn in a deft parliamentary members of the Texas Construction maneuver executed by Rep. Burt Association who wrote letters, made In This Issue Solomons when the bill was considered phone calls, made contributions to the on the House Floor. Except for one Political Action Committee, traveled to Member Mentions...... 2 small technical change in the House, the Austin, talked to Legislators and Staff, The Best Show in Town...... 3 measure that passed was the same as the and testified in support of passage of Governor’s Pen at Work...... 4 originally filed bill. This bill represented the legislation. Also a special thanks to Bills Go Down to the Wire...... 4 the agreement forged by representatives those TCA members who spent almost 3 Amendments...... 5 of the Texas Construction Association years negotiating an agreement with the and of the Texas Building Branch of the Texas Building Branch of the Associated Legislation Affecting Associated General Contractors. General Contractors. Construction...... 6 For background on the bill’s The bill will apply to construction TCA Political Action Committee– development and a discussion of the contracts entered into on or after September Its Importance to You...... 9 principal aspects of the legislation, see 1, 2007. So watch what you sign before VIP Legislatures...... 10 the article on this page by TCA’s Legal September 1! texas construction association, inc. 1 Board of Directors/Officers

OFFICERS Jo Wagner, CTO Inc, Harlingen, Texas Glenn Randle - CHAIR is serving as National PHCC President Mechanical Contractors Association of Texas for 2006-2007. She is only the 2nd fe- male president in the history of PHCC, Mackie Bounds – VICE CHAIR an association that began in 1883. Jo is Texas Masonry Council Craig Kramer of Astro Fence Company, also very active in legislation, testifying in support of the TCA Indemnification Houston, Texas is the recipient of the Steve Rians - SECRETARY American Subcontractors Association’s Texas Fire Sprinkler Contractors Association bill this session, and in support of the PHCC Indemnification bill in Washing- 2005-06 Chapter President of the Year ton, D.C. Jo has also strongly promoted Award for demonstrating superior Todd Hewitt - TREASURER leadership skills and motivating his Central Texas Subcontractors Association careers in the trades, and especially encourages companies to hire single chapter to achieve its goals. Moms. “Under Craig’s leadership, this Raymond Risk - President/CEO • • • • • • • Texas Construction Association chapter scored the highest of any chapter Michael Maraldo, a member of the on its annual self-evaluation report and Southwest Terrazzo Association was had membership growth of 15 percent,” DIRECTORS elected President of the National Ter- said 2006-07 ASA Vice President David Darlene Aitken razzo Mosaic Association (NTMA) at Bradbury. “Craig articulated clear American Subcontractors Association of the annual meeting of the association this Texas past April. Maraldo, owner of Southern goals as he took office — increase the Tile & Terrazzo Company, Houston, and number of members, get the members Bob Bertin a third generation family owner of the involved, and put the chapter on the Southwest Terrazzo Association company has been active in local, state, path to being the largest and strongest regional, and national association leader- chapter of ASA…If achieved, these Brian Chester ship positions for the past 19 years. The goals would put the chapter in a position American Subcontractors Association - North NTMA is a national association dedicat- Texas to offer more to the members and to ed to professional growth and promotion better serve subcontractors and the activities for commercial specialty sub- construction industry as a whole. And Keith Colvin contractors associated with the terrazzo Texas Iron Workers Employers’ Association under Craig’s leadership, the chapter flooring industry. • • • • • • • achieved these goals — establishing an Stephen Cox active Membership Committee to recruit Annual Sporting Clay Shoot will be Associated Plumbing-Heating-Cooling new members, leading the directors in Contractors of Texas hosted by ASA on Thurs- day, August 30th at the San Antonio Gun making regular calls to existing members Club. For more information on the event to shore up membership retention, and, of Paul Holden course, assuring that the association has DFW Drywall & Acoustical Contractors or sponsor information simply contact Association Heidi at the San Antonio Chapter at 210- the benefits and services in place to meet 349-2105. the expectation of these members.” Mike Kanetzky National Electrical Contractors Association

Jerry Kelly Texas Structural Steel Institute

David Mettauer Fire Equipment Distributors of Texas

Jason Schnurr Texas Council - Painting & Decorating Contractors of America

Jerry Wright Texas Glass Association

2 texas construction association, inc. THE BEST SHOW IN TOWN Sam Houston and Mirabeau B. Lamar would have been proud! Sam Houston, the hero of Texas’ of the Session. Then all Hades siders itself the more deliberative Independence and the winner at San seemed to break loose. Some mem- and civilized of the two Chambers Jacinto, was the Republic of Texas’ bers felt that they were not getting a (caused in part perhaps by the fact first President from 1836 until 1838. fair hearing on their legislation and that you only have 31 Senators while In 1838, Mirabeau B. Lamar was that the rulings of the Speaker tended the House has 150 Members), the elected the Second President of the to favor the Speaker’s supporters. A Senate was shut down for two days Republic of Texas. People at that ruling of the Speaker was challenged late in the Session while the Sena- time did not generally invite them and subsequently overturned by the tors and the Lieutenant Governor to the same party. They simply did body of the House. There were dis- met in closed Session to resolve dif- not play well together. One of the cussions concerning a motion to “re- ferences after the Senator serving principal actions of President Lamar move the Speaker from the Chair”, as the Dean of the Senate and the was to order that the Capitol of the i.e., remove the Speaker and appoint Lt. Governor engaged in a vigorous Republic be moved from Houston to someone else as Speaker. The only shouting match concerning bringing Austin, at that time an outpost still time a Speaker has been removed oc- up a Voter ID bill for consideration. located in Comanche country. Presi- curred in 1871. The bill failed to be considered when dent Lamar did this because he could one Senator arose off his sick bed not bear having the Capitol of the For the last two weeks of the and appeared in the Senate to cast Republic located in a city named af- Session, there were rumors that this the deciding vote to prevent consid- ter Sam Houston. Subsequently Sam motion could be made at anytime. eration (shades of the Alamo and Jim Houston was elected President again On the last week-end, the Speaker Bowie). Another Senator opposed to in the early 1840’s. One of his earli- was asked concerning whether he the legislation, who had just had a est acts was to send the Texas Rang- would recognize a Member mak- liver transplant, maintained a vigil at ers to Austin to reclaim the State Ar- ing such a motion. The ruling of the the Capitol to prevent the same bill chives and move the documents back Speaker was that no Member would from being considered despite the to Houston as one of the first steps in be recognized on such a motion. No orders of his doctor to not attend the moving the Capitol back to Houston. one was recognized on such a motion Session. The Rangers’ wagons were stopped before the House adjourned for good. by a woman named Angelina Eberly The Speaker avoided the coup-at While all this was going on, the who was prepared to fire a cannon on least for the present time. Legislature did do a lot of work. The Congress Avenue, thus the Capitol hours for the Legislators and staff remained in Austin. Near the beginning of the Ses- were long. The number of bills filed sion and without conferring with the increased over the previous Legisla- The 80th Session of the Leg- Legislature, the Governor by Execu- tive Session. In the House, 4,140 islature had some similarities. At tive Order required all girls when bills were filed, up 15 percent from 2 the very least they were simply not they became 6th Graders to be vac- years ago. Senate filings were 2,058 playing well together. The Session cinated to prevent the cancer causing bills, up 9 percent from two years began with a contested Speaker’s HPV virus. He also proposed selling ago. The numbers of bills that finally race. Rep. narrowly the lottery, continued to promote the passed were similar to the previous won re-election to a third term as building of the Trans Texas Corridor Legislative Session. The numbers Speaker. Although the key vote on and promoted the increased building also demonstrated that it is more the Speaker’s race was 80 to 69 sup- of tollroads. Regardless of the merits difficult to pass a bill than to kill porting the Speaker, the Speaker for or against the required vaccina- one—77% of the House Bills filed actually prevailed when one House tions, the Legislature overturned the failed to pass and 75% of the Senate Member decided not to switch sides Governor’s Executive Order requir- bills failed to pass. Constitutional to the challenger and this caused four ing mandatory vaccinations. The amendments fared worse: 91% of other members not to switch sides Lottery remains state property as the House proposed constitutional as well. If all five had switched, the apparently there were no buyers and amendments and 90% of the Senate vote would have been 75 to 74 in fa- the Legislature was lukewarm con- proposed constitutional amendments vor of the challenger. cerning the proposal. Legislation was failed. passed creating a quasi-moratorium All in all, it’s probably a good The House seemed to operate on new toll roads. thing that the constitution only al- well thereafter, perhaps moving a lows the Legislature to meet in Reg- little slowly, until the last few weeks While the Senate generally con- ular Session every other year! texas construction association, inc. 3 GOVERNOR’S VETO PEN AT WORK The Contingent Payment Bill continued from page 1 Governor Vetoes for Third Time Ban on Use of Reverse Auctions Subcontractors Association of Texas While Governor Perry did sign into a measure reforming the laws regarding backed legislation to outright ban contin- law the contingent payment bill, he did the ability to state and local governments gent pay clauses in construction contracts. veto HB 447 which included a section to condemn private property through the that banned the use of reverse auctions use of eminent domain. While this bill Realizing subcontractors would be more in construction contracts involving state received considerable support in the leg- effective with a broader coalition, ASA and local public works projects. If islature, Governor Perry vetoed the bill invited other subcontractor trade associa- nothing else, the Governor was consis- on the primary basis it would potentially tions to meet and explore forming an or- tent as this was the third consecutive force the governmental entity over-pay ganization of essentially a consortium of time he vetoed a bill containing that sec- to acquire property through eminent do- subcontractor organizations to promote tion. main. the legislative interests of subcontractors. The reverse auction provision was a In addition to the power of the Gov- The outgrowth of that effort was the for- part of a comprehensive bill which con- ernor to veto entire pieces of legislation, mation of TCA in 1998. solidated the various alternative project the Texas Governor has line item veto delivery processes for most governmen- power over items listed in the newly TCA then carried the torch of ban- tal entities into a single chapter of the passed $51.9 billon state budget. Gover- ning contingent payment clauses and be- Government Code. These various pro- nor Perry used the line item veto to pare gan to achieve more progress than any- cesses included construction manager- $646 million from the budget for the one outside the subcontracting industry agent, competitive sealed proposals for next two fiscal years. Nearly half of the expected. In 2002, AGC Texas Building construction services, construction man- cuts came from striking a $300 million Branch (“AGC”) approached TCA about ager-at-risk, design build and job order- line item relating to repaying the Federal trying to find a way to arrive at a mutual ing contracting. HB 447 set standards Government moneys allegedly owed for agreement on the general issue of contin- and made the procedures more uniform. Medicaid services. The higher education gent pay. It was decided to have a series Governor Perry vetoed in excess of budgets were also principal targets of 50 bills passed by the Legislature in the cuts. Community college appropriations of meetings between representatives of 2007 legislative session. This was the designated for group health care insur- TCA and AGC. The two groups hired a second largest numbers of bills vetoed ance payments were cut $154 million. retired construction lawyer from North by a Texas Governor. The record is also While the Texas Constitution limits Carolina to facilitate or “mediate” the is- held by Governor Perry as he vetoed 82 the authority of the Governor in many sue in hopes of arriving at an agreement. pieces of legislation during his first year areas, the power of the veto is alive and After six to eight all day negotiating ses- in office in 2001. well in Texas and the current Gover- sions, a compromise bill was developed One of the most prominent bills ve- nor is not bashful about exercising that before the end of 2002. During the 2003 toed by the Governor involved HB 2006, power. Texas Legislative Session, other con- struction associations sought, and were BILLS GO DOWN TO WIRE BEFORE TIME RUNS OUT granted, input into the Bill. Still, several The Indemnity and Consolidated Insur- opponents of the legislation to negotiate influential general contractors were dis- ance Program bills went down to the wire the indemnity issues. This past Session before finally failing to pass in the recent was the first time that a stand-alone bill satisfied and the Bill did not pass. State Legislative Session. banning broad form indemnity passed one After more negotiating sessions in The bill banning the use of broad Chamber and this greatly improves our 2004, changes were made to arrive at a form indemnity clauses, SB 324, passed standing on the issue. Our opposition now the Senate in mid-April by a substantial understands that this issue is not going more refined compromise Bill. The Bill, majority. However, opposition led by away. nevertheless, did not pass in 2005 Legisla- the petro-chemical industry and the Texas The Consolidated Insurance Program tive Session. In 2007, victory was achieved Civil Justice League were able to keep the bills, SB 354/HB 2014, died in the final legislation bottled up in the House Com- days despite reaching an agreement on the and the Bill is now law. It is effective for mittee on Civil Practices. Efforts to reach principal issues covered by the bills. The subcontracts and purchase orders entered a compromise agreement in the final days principal opponents of the legislation, the into after September 1, 2007. of the Session failed. Texas Building Branch-AGC, the Texas The sponsors of the legislation were Civil Justice League (representing primarily The Bill, therefore, reflects compro- Senator Robert Duncan and Representative the petro-chemical industry) and a couple of mise. Neither general contractors or sub- Craig Eiland. They took active roles and public transportation authorities, all finally contractors and suppliers got everything did excellent jobs in pushing the legislation agreed to support the legislation. However, they wanted. The Bill is quite complex while taking on some extremely powerful by the time this occurred, there was not opponents. The subcontractor and supplier enough time to pass the legislation through because it had to meet the divergent in- community owes them a debt of gratitude both chambers of the Legislature. terests of numerous people and groups for their efforts! The final agreed version will likely be involved in the compromise. It does not During the interim between Legislative used as the blueprint for anticipated legisla- Sessions, TCA will be meeting with the tion in the next Session. continued on page 7 4 texas construction association, inc. Proposed Constitutional Amendments for November 6th Election Day

The Texas Constitution provides that the legislature, by a two-thirds vote of all members of each house, may propose amendments revising the constitution and that proposed amendments must then be submitted for approval to the quali- fied voters of the state. A proposed amendment becomes a part of the constitution if a majority of the votes cast in an election on the proposition are cast in its favor.

The following table lists the constitutional amendments being proposed by the Texas Legislature for the November 6th election. You may view the complete amendment at www.capitol.state.tx.us. At the home page, insert the bill number in the Search Legislation box.

Bill No. Summary HJR 6 Authorizing the denial of bail to a person who violates certain court orders or conditions of release in a felony or family violence case HJR 19 Requiring a record vote be taken by a house of the legislature on final passage of any bill, other than certain local bills, of a resolution proposing or ratifying a constitutional amendment, or of any other non-ceremonial resolution, and to provide for public access on the Internet to those record votes. SJR 20 Providing for the issuance of additional general obligation bonds by the Texas Water Development Board in an amount not to exceed $250 million to provide assistance to economically distressed areas. SJR 29 Authorizing the legislature to exempt all or part of the residence homesteads of certain totally disabled veterans from ad valorem taxation and authorizing a change in the manner of determining the amount of the existing exemption from ad valorem taxation to which a disabled veteran is entitled. HJR 30 Allowing governmental entities to sell property acquired through eminent domain back to the previous owners at the price the entities paid to acquire the property. HJR 36 Permitting a justice or judge who reaches the mandatory retirement age while in office to serve the remainder of the justice’s or judge’s current term. HJR 40 Authorizing the legislature to provide that the maximum appraised value of a residence homestead for ad valorem taxation is limited to the lesser of the most recent market value of the residence homestead as determined by the appraisal entity or 110 percent, or a greater percentage, of the appraised value of the residence homestead for the preceding tax year. SJR 44 Authorizing the legislature to permit the voters of a municipality having a population of less than 10,000 to authorize the governing body of the municipality to enter into an agreement with an owner of real property in or adjacent to an area in the municipality that has been approved for funding under certain programs administered by the Texas Department of Agriculture under which the parties agree that all ad valorem taxes imposed on the owner’s property may not be increased for the first five tax years after the tax year in which the agreement is entered into. HJR 54 Authorizing the legislature to exempt from ad valorem taxation one motor vehicle owned by an individual and used in the course of the owner’s occupation or profession and also for personal activities of the owner. SJR 57 Providing for the issuance of $500 million in general obligation bonds to finance educational loans to students and authorizing bond enhancement agreements with respect to general obligation bonds issued for that purpose. SJR 64 Providing for the issuance of general obligation bonds by the Texas Transportation Commission in an amount not to exceed $5 billion to provide funding for highway improvement projects. SJR 65 Authorizing the issuance of up to $1 billion in bonds payable from the general revenues of the state for maintenance, improvement, repair, and construction projects and for the purchase of needed equipment. HJR 69 Abolishing the constitutional authority for the office of inspector of hides and animals. HJR 72 Clarifying certain provisions relating to the making of a home equity loan and use of home equity loan proceeds. HJR 90 Requiring the creation of the Cancer Prevention and Research Institute of Texas and authorizing the issuance of up to $3 billion in bonds payable from the general revenues of the state for research in Texas to find the causes of and cures for cancer. HJR 103 Providing the continuation of the constitutional appropriation for facilities and other capital items at Angelo State University on a change in the governance of the university.

texas construction association, inc. 5 Select Legislation Affecting the Construction Industry Bills that Passed: SB 704. Assistance to Small Contractors for Certain State Construction SB 324. Contingent Payment. This measure limits the use of contingent Projects. This measure requires the Workforce Commission and the Depart- payment clauses in construction contracts. The bill passed substantially as ment of Insurance to provide support and assistance for small contractors for filed and reflects the agreement between the Texas Construction Association their safety programs and for obtaining bonds. and the Texas Building Branch of the AGC. Bills Passing but Vetoed. HB 1268. Attorney Fees in Dispute with Public Entity. Provides that a HB 447. Consolidated of the Public Works Procurement Statutes Into construction contract involving a public entity containing a clause providing Single Statute. Third time was not a charm. Governor Perry vetoed this bill for recovery of attorney fees by the public entity if they are the prevailing for the third consecutive Session (the other two bills were similar to the cur- party is not effective unless the contract also provides that the other parties to rent bill). The measure would have placed the various procurement statutes the contract may also recover attorney fees if they prevail. for public projects in one place and would have established standards and uni- formity for procurement. In addition, the bill contained a provision banning HB 3928. Business Franchise Tax Clean-up. This measure makes technical the use of reverse auctions on public construction projects. This was also the corrections and other minor changes to the new business franchise tax. The third time for the ban to be vetoed. only major change in the legislation involved allowing small businesses with more than $300,000 up to $900,000 to pay on a graduated scale the franchise Bills Failing to Pass. tax. Businesses with revenues of $300,000 or less are exempt from the tax. SB 346. Bill Banning Broad Form Indemnification and Additional In- sureds Clauses in Construction Contracts. This measure passed the Senate HB 3147. Condominium Construction Defect Claims. The measure but stalled in the House Civil Practices Committee. This was the first time brings condominium construction defect claims under the purview of the Res- that a stand-alone bill banning the use of broad form indemnification clauses idential Construction Liability Act. This requires notice of any claims or de- and additional insured clauses in construction contracts passed either Chamber fects prior to the filing of a lawsuit involving such claims. Under the change, of the Legislature. The challenge now is to pass both Chambers. the contractor would first be given an opportunity to resolve the claim before a suit is filed. SB 354. Consolidated Insurance Program. This measure passed both Committees in the Senate and in the House. Despite having reached an agree- SB 9. “Safe School” Bill. The measure is amended to provide that construc- ment with the principal stakeholders in the legislation at that time, the bills tion employees responding to emergency service calls will not be subject to died awaiting consideration on the Senate Floor because of lack of time left in the bill’s criminal background check and fingerprinting requirements. Leg- the Session. This agreement provided a basis for the filing of this bill when islative intent is also read into the record that these requirements are not ex- the Legislature returns in 2009. tended to construction personnel working in a secured area that is not in direct contact with students. HB 497. Dispute Resolution Boards for Construction Projects. The TCA opposed this legislation which would have established Dispute Resolution HB 1029. Exemption from Electrical Licensing Requirements for Certain Boards to resolve disputes on construction projects. While developing a pro- Work Performed by a Plumber. This bill exempts plumbers from having cess to resolve disputes is important, under this bill subcontractors and sup- to hold an electrician’s license when performing work involving a plumbing pliers would have had little if any involvement in the process. Subcontractors fixture or appliance including a water heater, food disposer, garbage disposal, and suppliers could not serve on the Board, had no input into the selection of water softener, dishwashing machine and clothes washing machine. the Board, may not have had any involvement in any of the dispute proceed- ings and would have been bound by decisions made by the Board. HB 463. Registration of Air Conditioning and Refrigeration Technicians. This measure requires a technician assisting a licensed air conditioning and HB 1413. Licensure of Fire Protection Sprinkler Technicians. This bill refrigeration contractor in performing their work must be registered with the would have licensed fire sprinkler technicians. The Texas Fire Sprinkler Texas Department of Licensing and Regulation. Contractors Association was opposed to the legislation and worked diligently against the measure without success. HB 1038. Texas Residential Construction Commission. This measure makes several changes in the TRCC Act. Most involve giving greater rights HB 1281. Licensure and Regulation of certain Journeyman and Appren- to the consumer and making the homebuilder more responsible under the Act. tice Sheet Metal Workers. This measure which would have licensed sheet The Commission is granted greater authority to fine builders who are not reg- metal workers failed to pass when a point of order was called on the bill as it istered as the Act requires. was considered on the House Floor.

HB 2075. Retainage Held by the Department of Transportation for High- SB 628. Expanding the Texas Residential Construction Commission Act way Projects. The Texas Department of Transportation may retain up to 5% to include Condominium Apartments. This measure died in the Senate of the amount due on a project and may retain the amount until the project is Committee. completed or may release a portion or all at any time. SB 650. Lien Reform Bill. This bill would have made important changes in SB 749. Multidistrict Litigation Claims involving Asbestos and Silicosis our lien laws but failed to pass out of the Senate Committee. Claims. Major legislation involving asbestos and silicosis claims was passed in 2005 and part of the litigation involved the establishment of multidistrict Immigration Reform Bills. None of the bills dealing with immigration re- litigation pretrial courts to help resolve and review pre-trial issues and expe- form passed during this Session. Primarily, this was because the remedy is es- dite the review and handling of these claims. This measure makes changes to sentially a federal remedy and would require action by the Federal Congress. clear up ambiguities of the process in order to enhance the review and disposi- Also some of the measures had serious constitutional and legal questions. tion of the cases. Most of the bills failed to even be considered in Committee.

SB 1729. Relating to Elevators, Escalators, People Movers and other Business Tax Reform. The only passing bills that involved the new business Related Equipment. This measure updated which Codes are applicable to franchise tax were technical and corrective in nature. None of the bills filed the maintenance and installation of elevators, escalators, people movers, and that would have lowered the rate or provided other relief were seriously con- similar equipment. sidered. The Legislature is waiting to see what the current franchise tax raises in terms of revenue. This measure will help to determine what changes could HB 1766. Theft of Wire and Cable. This measure enhances the punishment be made in the next Legislative Session. and the classification to a State Jail Felony for the theft of wire or cable that is at least 50% aluminum, bronze or copper. Punishment for such felony is Others. There were several bills involving such issues as minimum wage, tax not less than 180 days in jail nor more than 2 years and a fine not to exceed credits for the providing of health care, preferences for public projects of those $10,000. providing health care and small employers health insurance. None of these bills passed. 6 texas construction association, inc. The Contingent Payment provided absolute protection to the gen- for the construction project; and eral contractor. Now, however, the law 2. The general contractor either Bill continued from page 4 is clear: When deficient work quality is (a) makes reasonable efforts to ban contingent payment clauses alto- the reason for the owner’s nonpayment, collect the amount owed to the gether. It is not the answer to all subcon- the clause is no protection for a general subcontractor or supplier, or tractors’ problems. contractor from a properly performing (b) offers to assign to the sub- In my opinion, however, subcon- subcontractor or supplier. contractor or supplier the gen- tractors and suppliers are much better In some cases, proving why the eral contractor’s right to sue the off than they were before. There are owner is refusing to pay the general con- owner for collection of the sub- now instances when contingent payment tractor may be difficult. Nevertheless, contractor’s unpaid balance. clauses are simply not enforceable. No subcontractors and suppliers now clearly The Bill further provides that if the longer can general contractors take com- have the right to do so, meaning they now owner does not provide the financial in- fort that the contingent payment clause have a chance to win. In my view, that formation detailed in the Bill, the gen- will protect them all of the time. The is a great improvement. Hopefully, the eral contractor (and all subs and suppli- Bill requires the general contractors to subcontractors’ and suppliers’ improved ers) are relieved from their obligations be much more proactive to receive ben- positions will result in more voluntary to start or continue performance of their efits of the clause. In short, in many sit- payments, or at least, more settlements. contracts. uations subcontractors can now win de- B. Owner’s Financial Inability To It is important to note that the sub- spite a contingent payment clause. That Pay. contractor does not need to request the was essentially impossible until now. Who should run the risk of the own- financial information. But the general er’s insolvency was the subject of many contractor must timely provide it, at its When are contingent payment lengthy and heated discussions during own initiative, in order to avoid being clauses unenforceable? The two most negotiations. The general contractors judged by the “unconsionability” test. common reasons why owners do not pay simply would not agree to a Bill plac- In addition to providing the financial general contractors are when (1) work is ing that risk on them. They saw it as an information to avoid “unconsionablilty,” either defective or does not comply with event that would threaten their own fi- one of the things the general contractor the contract documents, and (2) the own- nancial viability. must also do is make reasonable efforts er is insolvent or bankrupt. Who should The compromise adopted by the Bill to collect the subcontractor’s or suppli- bear the risk in these instances was hotly is that the enforceability of the clause is er’s unpaid balance. What is reasonable debated during the negotiation sessions. subject to an “unconscionability” test. is undefined in the Bill. Presumably, all The Bill addresses both situations. A contingent payment clause is unen- circumstances will be considered. For A. Defective or Noncompliant forceable if the judge, jury, or arbitrators example, if the owner is unable to pay, Work. find that it would be “unconscionable” the general contractor could argue it The Bill states that when the owner’s to enforce it. That is a standard under would be unreasonable to sue the owner. nonpayment is the result of the general which most subcontractors and suppli- On the other hand, the general contrac- contractor failing to meet its contrac- ers should be pleased to be judged. It tor may not win that argument. Again, tual obligations, the contingent payment is believed that most fact finders would whether the general contractor’s efforts clause is unenforceable. This is the case have sympathy upon a “poor old unpaid were reasonable will be decided by the unless the subcontractor or supplier seek- subcontractor” who properly performed judge, jury, or arbitrators. Once again, ing payment breached its contractual ob- its work. Subcontractors would not win this gives the subcontractors and suppli- ligations, and that breach is one of the every case, but at least they have a “fair- ers a chance to win. Before this Bill, they reasons why the owner is refusing to pay. ness” argument that simply did not exist had virtually no chance to win, but now Accordingly, defective work caused before this Bill. they do. Hopefully, this will lead to more by the general contractor, or another Recognizing their vulnerability, the voluntary payments, or at least, result in subcontractor, makes the contingent general contractors sought a “safe ha- settlements. Before this Bill, neither payment clause unenforceable to the ven” from being judged by the standard happened. subcontractor whose quality of work is of “unconscionability.” Accordingly, the In lieu of making reasonable efforts not in dispute. In other words, the clause Bill provides that the clause is not un- to settle, the general contractor may does not protect the general contractor. conscionable if: choose to assign to the subcontractor the The general contractor must pay even 1. Before the subcontract or pur- right to sue the owner for the subcon- though it has not been paid. chase order becomes enforce- tractor’s unpaid balance. This assigned It simply makes no sense to punish a able (by signing or otherwise), right to sue must not be subject to any subcontractor or supplier that has prop- the general contractor gives the defenses created by the general contrac- erly performed its contract, and the Bill subcontractor or supplier, in tor. Otherwise, the general contractor does not allow that to happen. Previ- writing, certain itemized and will be subject to the “unconscionabil- ously, the law was unclear and unsettled detailed financial information ity” standard. on this point, at best. At worst, the law about the owner’s ability to pay continued on next page texas construction association, inc. 7 The Contingent Payment a rather drastic option that, in some cir- eral contractor. If the general contractor cumstances, comes with steep financial wants to prevent the notice from becom- Bill continued from page 7 risks. The Bill provides yet another “ar- ing effective, it is the general contractor An assignment does not automatical- row in the quiver” of subcontractors and that must timely inform the subcontractor ly get the subcontractor paid. He must suppliers. of such fact. Basically, the subcontractor still sue the owner for it. But at least Notice Objecting To Future Enforce- can send the notice and simply wait to it puts the subcontractor in control of ability of the Clause. see what happens. the collection process. The assignment When the subcontractor or supplier Upon receiving the notice, the gen- means the subcontractor in control of its is unpaid 46 days after it submitted an in- eral contractor is faced with a hard deci- own destiny. voice or pay request, the Bill allows them sion. Does he trust the owner to pay its to send a notice to the general contractor bills and let the protection of the contin- More situations when the clause is objecting to further enforceability of the gent payment clause disappear? If he unenforceable. contingent payment clause for future labor does that, the general contractor bears the C. The Clause Is Unenforceable or materials. The notice does not become risk of the owner’s nonpayment, or does When The Owner And General Contrac- effective until the later of: (a) ten days the general contractor press hard for the tor Are In Actuality One In The Same. after the general contractor receives the owner’s payment? If it is not made be- The contingent payment clause is notice, or (b) 8 days after interest begins fore the contingent payment clause be- not enforceable when the owner can ef- to accrue against the owner on privately comes ineffective, should the decision be fectively control the general contractor, or federally owned projects under their to suspend performance on all work as or vice versa, through common directors, respective prompt pay acts, or (c) 11days authorized by the prompt pay act? The officers, owners, or otherwise. It is only after interest begins to accrue against the simple sending of the notice of objection fair that if the general contractor can con- owner on state public projects. by the subcontractor can force the general trol whether it gets paid by the owner, the For example, on a privately owned contractor to make uncomfortable deci- contingent payment clause should be in- project, interest begins to accrue against sions. Hopefully, the ultimate outcome th effective. That is what the Bill provides. the owner on the 36 day after the gen- will be quicker voluntary payment from Before the Bill, the subcontractor’s right eral contractor submits its pay request. the owner resulting in a more free flow of to collect in face of a contingent payment The contingent payment clause becomes payments to everybody else. clause in this situation was, at best, un- unenforceable for future work beginning th clear. At worst, the contingent payment on the 44 day after the owner receives MISCELLANEOUS clause totally protected the general con- the general contractor’s pay request, or A. Contingent Pay Clause Does Not tractor. Now, it is does not. 11 days after the general contractor re- Invalidate A Lien. Before the Bill, there D. Stopping The Bleeding When ceives the subcontractor’s notice, which was a debate among construction attor- The Owner Is Slow Pay Or Refuses To ever is later. neys whether a contingent payment clause Pay During The Course of Construction. The notice, however, is ineffective if meant that subcontractors and suppliers The provisions of the Bill discussed the owner has a good faith dispute over could not assert a mechanics and materi- above are more likely to aid in collecting the amount owed to the general contrac- almens lien. Without going into the legal final payments and perhaps later unpaid tor that involves the notifying subcon- theories behind these issues, suffice it to progress pay requests or invoices after tractor’s or supplier’s work or materials. say that the Bill states that a contingent the work is complete. Those provisions The general contractor must notify the pay clause cannot be used to invalidate may not be much help when nonpayment subcontractor or supplier giving the no- the enforceability or perfection of a me- occurs while the project is in the middle tice of the owner’s good faith dispute five chanic’s lien. of construction. days before the notice becomes effective, B. The Application of the Bill Is Not The subcontractor is often faced with or five days after the general contractor Confined To General Contractors. The nonpayment of progress billings where receives the notice, whichever is later. Bill applies not only to first tier subcon- the contract has a contingent payment Admittedly, this entire notice process tracts and purchase orders of the general clause coupled with a contract clause is complex and hard to understand. The contractor. It also applies to sub-subcon- forcing the subcontractor or supplier to Bill provides a lot of ways to negate the tracts between first tier subcontractors continue performance when a dispute oc- subcontractor’s or supplier’s notice. It and suppliers and their second tier sub- curs. What is the subcontractor or sup- also takes a long time for the notice to subcontractors and suppliers. Contingent plier to do? Is there a way they can stop become effective. For the subcontractor pay clauses between subcontractors and the bleeding? Do they have to continue to know the precise date it becomes ef- their lower tier subs and suppliers are to keep providing labor and materials fective, it must know the date the owner subject to the same rules. when the outlook of payment is ques- received the general contractor’s pay re- C. Exclusions From The Bill. The tionable? Of course, the private and state quest. Nevertheless, the date on which Bill does not apply to all construction re- public prompt pay acts give them the the subcontractor or supplier can start the lated contracts. Some of the contracts ex- right to suspend performance. But that is process is easily determined, 46 days af- cluded from the Bill are contracts solely ter their invoice was submitted to the gen- continued on page 11 8 texas construction association, inc. TCA POLITICAL ACTION COMMITTEE---ITS IMPORTANCE TO YOU “Kind words and a gun will get you much farther along than kind words alone.” Attributed to Al Capone

To paraphrase Mr. Capone, kind words and involving your taxes, your tort liability, your con- as to where the dollars go? All contributors to the a campaign contribution also undoubtedly garner tracts, your insurance protection, the roads you trav- PAC can let the PAC Board know which candidates greater attention from your elected representatives el, the education of your workforce and a myriad of the contributor supports or opposes. Input from than kind words alone. The election process has other issues. In order to have a say in these issues, members is one of the criteria that is used to make become an expensive proposition and candidates you have to be involved and your Association must decisions to support or oppose. Better yet, become for office cannot be successful without campaign have the ability to make contributions to candidates involved with the PAC. Volunteer to be on the contributions from individuals and political action who are sympathetic to your issues. If only your PAC Board. Also as the TCA and its PAC grows, committees. If an individual or organization is go- opponents have a PAC, you can rest assured that the TCA hopes to establish local PAC Boards to ing to be involved in the legislative process, they that they are not advancing your interests. assist in the evaluation of local candidates. have to be involved in the election process. What does the PAC do? The Texas Construc- Are there limits on how much I can contrib- A Political Action Committee (PAC) is the tion Association PAC makes contributions primari- ute? There are no limits to how much an individual name given to a group organized to combine the ly to candidates for the Texas Senate and House and can contribute to the PAC. contributions of many individuals and make con- to some statewide offices. The TCA staff provides The only limitation is that corporate funds tributions to elect or defeat candidates for public information about the candidates, their positions cannot be used as contributions to candidates for office. The Texas Construction Association PAC and information on local subcontractor/supplier the Legislature and statewide offices in Texas. The is organized primarily to make contributions to in- support to the TCA PAC Board which is composed PAC contributions to the candidates have to be dividuals running for the Texas Legislature. Con- of subcontractors and suppliers. The Board makes non-corporate dollars. Thus the funds contributed tributions are also often made for Texas statewide the decision as to which candidates to support or to the PAC must be non-corporate funds. races such as those for Governor, Lt. Governor and oppose. Factors considered include the candidates What is the goal of the TCA PAC for 2007? Comptroller. position on construction issues, support by local The PAC hopes to raise $100,000 in 2007. The pri- While the TCA Political Action Committee is subcontractors and suppliers, and the “winnability” mary election is the first Tuesday in March, 2008 small compared with many other PACs, including of the candidate. and contributions to some candidates will begin many PACs of groups and individuals who have Why should I contribute to the TCA PAC later in 2007. interests that are harmful or detrimental to subcon- when I already make contributions to candidates? When should I make a contribution? Right tractors and suppliers, the ability to at least make The TCA PAC is able to pool the resources of nu- now. Contributions to the PAC can be made some contributions to sympathetic and influential merous subcontractors to have a greater impact throughout the year. legislators allows subs and suppliers to have influ- than a single individual. Individual contributions How do I become involved with TCA PAC? ence on affairs that affect them. are important and TCA members are encouraged to Easy! Contact the Texas Construction Association if Why do subcontractors and suppliers need a continue making individual contributions, but the you want to become involved. Write a check to Tex- PAC? The Texas Legislature is involved in your combined dollars of the PAC has a greater impact as Construction Association PAC and mail to 602 business. Their decisions affect the way you do on more races. W. 13th, Austin, Texas 78701. For more information your business every day. They pass or defeat laws If I contribute to the TCA PAC, do I have a say on the PAC, contact the TCA at 512/473-3773.

texas construction association, inc. 9 VIP Legislators Many legislators helped the construction industry, particularly subcontractors and suppliers during the last legislative session. Key legisla- tors sponsored legislation on behalf of the Texas Construction Association and also helped defeat bad bills and bad amendments, as well as vot- ing with our industry. Several legislators were especially helpful to the success of subcontractors and suppliers and these included:

Sen. Bob Deuell, Sen. John Carona, ment and other issues important to subcontractors Greenville and suppliers are heard. He was instrumental in Sen. Deuell was the Senate Sen. Carona has been a striking a bad amendment from the Contingent sponsor who successfully longtime supporter of Payment bill on the House Floor and also filled in passed the Contingent Pay- the construction industry for the Sponsor of the bill to help pass the bill out ment bill this past session. and of subcontractors of the House. Subcontractors and sup- and suppliers in particu- pliers had tried for several lar. He was the Senate Rep. Gary Elkins, sessions to pass the bill sponsor of the Con- Houston out of the Senate and Sen. solidated Insurance Pro- Rep. Elkins is another Deuell was successful on his first try as sponsor. gram bill of which he and his staff worked long longtime member of the The Senator also voted for the indemnity bill ban- and hard on its passage. Even though time ran Business and Industry ning the use of broad form indemnity clauses in out on the bill, the Senator and his staff helped to Committee who has been construction contracts. forge an agreement on the bill among the primary very supportive of issues stakeholders which will likely form the basis of important to subcontrac- Rep. Warren Chisum, Pampa legislation filed in the next Session. tors and suppliers that Rep. Chisum was the House have been heard in that sponsor of the Contingent Pay- Rep. John Smithee, Ama- committee. He sup- ment bill. While serving as the rillo ported the Contingent Payment bill each time it Chair of the House Appropria- Rep. Smithee has served was considered in Committee (over a period of tions and being heavily engaged as the Chair of the House several years) and served as a floor leader to as- in the passage of the Appropria- Insurance Committee for sist passage this past session. tions bill, he took the time to many years. During that sponsor and work to pass the time he has supported the Rep. Beverly Woolley, Senate version of the Contingent Payment bill construction industry on Houston through the House. insurance issues important to the industry. He Rep. Woolley serves was the sponsor of the House version of the Con- as Chair of the House Sen. Robert Duncan, solidated Insurance Program bill and helped to Calendars Committee. Lubbock pass the bill out of the Insurance Committee. He This is one of the most Sen. Robert Duncan also assisted in reaching an agreement on the bill important Committees ventured where no Sena- with those opposing the bill. in the House for the rea- tor had ventured before. son that this Committee He passed a bill banning Sen. Troy Fraser, determines which bills broad form indemnity Horseshoe Bay are set on the House Cal- clauses in construction Sen. Fraser serves as endar for Floor consideration. Each of the last contracts. Even though the Chair of the Senate three legislative sessions, Rep. Woolley has been he faced very formidable Business and Commerce instrumental in getting the bill set on the Calen- foes ranging from the oil and gas industry to the Committee. During the dar. Two sessions ago, she set the bill as the first general contractors, he skillfully and eloquently interim he committed bill on the entire calendar. advocated for the legislation and was able to pass to TCA his support of the bill through the Senate. the contingent payment Rep. Dwayne Bohac, bill and helped to pass Houston Rep. Craig Eiland, the measure out of the Business and Commerce Another long time member Galveston Committee. True to his word, the Contingent of the Business and Industry Rep. Eiland was the Payment bill was the first bill heard this session Committee, Rep. Bohac House sponsor of the bill in Business and Commerce and was also the first has been very supportive banning the use of broad bill passed out the Committee this session. He of legislation important to form indemnification also was a strong supporter of banning broad subcontractors and suppli- clauses in construction form indemnification clauses. ers. He has voted for the contract. He effectively Contingent Payment bill each time it has been advocated for the bill in Committee. He took the Rep. Burt Solomons, considered and also served as a floor leader when time to ably question adverse witnesses when the Carrollton the bill was passed this session in the House. bill was considered in Committee. His question- As well as serving as the ing and his advocacy on the issue displayed a Chair of Financial Insti- knowledge of the issue unequaled by anyone in tutions, Rep. Solomons the House. He also spent an innumerable amount is a long-time member of hours attempting to negotiate the bill with the of the House Business opposition. and Industry Committee where contingent pay-

10 texas construction association, inc. $$$** Propane Powered The Contingent Payment a very expensive fight to void the appli- cability of the clause with, at best, a most Bill continued from page 8 Forklift Tax Credit **$$$ uncertain outcome. Now, subcontractors involving design services or construction and suppliers have a definite chance to Propane used in forklifts is eligible for a involving roads, bridges, highways, wa- win the battle. Subcontractors and sup- 50-cent-per-gallon federal motor fuel tax ter supply and water plants, wastewater pliers even have the opportunity during credit. The credit runs through Septem- plants, wharfs, docks, airport runways, the job to void the clause for future work ber 30, 2009, and could be extended! or related projects associated with civil if they are unpaid for at least 46 days. 1. Who files for the tax credit for pro- engineering construction. Also, the Bill No longer can general contractors pane used in forklifts? does not apply to detached single-family feel the comfort of absolute contingent In most cases, the customer files. Under residences, duplexes, triplexes, and qua- payment clause protection. To protect IRS rules, the entity that buys the fuel druplexes. One should refer to the Bill their contingent pay position, general and loads the propane cylinders onto the for a more complete listing of projects contractors must actively take initiatives forklifts is considered the Alternative Fu- or contracts to which the Bill does not by providing unsolicited detailed finan- eler and is eligible to file for the credit. apply. cial information from owners. They must 2. What IRS forms are needed to claim also send timely notices in certain situa- the credit? CONCLUSION tions. The administrative demands placed Each entity wishing to claim the credit There is a lot that this Bill does, but upon them by this Bill are numerous, and must register by filing IRS Form 637. A there is a lot it does not do. It is not a in my opinion, quite burdensome. sample Form 637 is available at www. panacea for subcontractors and suppliers. In the final analysis, the general propane.tx.gov. Once approved, the IRS The Bill is complex and not the model contractors are not as protected as they will issue a 637 number with “AL” at the of clarity. No doubt, the interpretation of used to be. It is hoped that this Bill will end, indicating IRS authorization to file the Bill will be the subject of litigation. cause the general contracting commu- as an alternative fueler. The main reason for these characteristics nity as a whole to be much more proac- Forklift operators that are not govern- stems from the Bill being the subject of tive in pursing payment from the owner. ment entities claim the tax refund on compromise between different segments Perhaps the general contractor will more their income tax return at the end of the of the construction industry with diver- prudently analyze the financial informa- year. gent interests to protect. Each side fought tion about the owner’s ability to pay be- State and local government entities sub- hard to protect their interests. Another fore disseminating it to subcontractors. mit Form 8849, “Claim for Refund of factor is the numerous associations and Hopefully, the uncertainties presented by Excise Taxes,” on the gallons they use in groups of companies demanding a voice the Bill will make the parties much more a forklift or motor vehicle. They can file in the language of the Bill. apt to be reasonable with each other and as often as they Despite these characteristics, how- settle their differences rather than risk want, as long as they claim a credit of ever, the Bill squarely addresses the two the chance of losing a battle. I am, and $750 or more on each filing. main factors involving nonpayment: (1) I think all of the subcontractors on the 3. Where do I obtain the forms? quality of work issues, and (2) the finan- TCA negotiating team are, very hopeful You can download the forms at www.irs. cial inability of an owner to pay. Before subcontractors and suppliers will greatly gov. You can view a sample completed the Bill, subcontractors and suppliers had benefit from this Bill. Form 637 on AFRED’s web site, www. propane.tx.gov. 4. How long do I have to file for the credit? The credit must be claimed within three years following the close of the year the claim occurred. 5. Is there a limit to the amount I can claim? No. You must have on file proper docu- mentation of the propane purchased and used in the forklift during the period of the claim. For more information about the propane motorfuel excise tax credit, contact Heather Ball, Railroad Commission of Tex- as, at (512) 463-7359 or e-mail [email protected]. texas construction association, inc. 11 American Subcontractors SMACNA Association of Texas North Texas Chapter

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